Eichengreen: Light at end of financial crisis tunnel at least two years off

	Barry Eichengreen offers his views on the financial crisis.

As a professor of economics and political science at the University of California, Berkeley, Barry Eichengreen couldn’t resist grading the national policy response to the current economic crisis.
On monetary policy, the Obama administration earned an A-. On fiscal policy, a B . On housing policies, a B .
But on fixing the banking system, “I could only come up with an incomplete,” said Eichengreen, the last speaker at the daylong 2009 Academic Symposium held on April 16.
“There has been some improvement in the credit markets,” he said. “The mortgage market is showing some signs of life, but the remaining problem with the banks is that there is a decline in lending by banks receiving TARP (Troubled Asset Relief Program) funding money, and my sense of the problem is that the insolvent banks need more capital as a cushion before they can start feeling comfortable lending again. The four biggest banks in the U.S. need $450 billion simply to absorb losses.”
Despite the relatively high marks for actions taken by the Obama administration, Eichengreen is hardly optimistic. He told the crowd of roughly 400 who attended his talk, “The Financial Crisis: How We Got Here and Where We’re Going,” that the government has “attempted to fill a $3 trillion hole with $750 billion of public spending.”
That, he said, “is a very big hole to fill and I do not think the political appetite exists to go back to the well one more time.”
‘There is hope’
After he was introduced by Deepa Chandrasekaran, assistant professor of marketing, Eichengreen walked his listeners through a brief tutorial that reviewed the possible origins of the crisis and the exacerbating factors, which include a loosening of regulations and excessive risk-taking on the part of those “with their hands on the levers of policy.”
Many of them, he said, had not lived through the Great Depression, and the lessons of that era faded. As regulations loosened, competing financial institutions infringed upon each other’s turf, engaged in risk-taking to survive, and regulators were starved of resources.
“In that kind of climate,” he added, “when everyone in the financial market is making money, whistle-blowers were not particularly rewarded or encouraged.”
He also dissected how the crisis in the U.S. quickly evolved into a global problem, impacting Asia and Eastern Europe, as well as lesser players in the global economy such as Thailand and Korea.
“Nobody realized how quickly a dollar glut can turn into a dollar shortage,” he said.
As traditional markers of the economy—such as unemployment, housing values, mortgage foreclosures and savings rates—continue to point toward a dismal 2009 and 2010, Eichengreen does see some light at the end of the tunnel.
Clearly, he said, “there is no instantaneous fix. But looking at other countries and what has worked in the past, it’s probably reasonable to suggest that it will be at least two years before banks will feel comfortable lending on a normal scale.”
He is also buoyed by President Obama’s three-point housing plan that will encourage homeowners to stay in their homes and help banks reduce a glut of abandoned properties.
“The policy response has been much more aggressive in this crisis than it was 80 years ago,” he said. “So there is hope.”
In the question and answer session that followed his talk, Eichengreen was interviewed by Anthony O’Brien, professor of economics, who posed questions on bank nationalization, regulatory issues and policy making.
“Your talk was interesting, thorough, and thoroughly unnerving,” said O’Brien, who joked that Eichengreen’s comments caused him to consider burying his savings in his backyard.
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